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Realizing the Value of Your Business

Sponsored ContentBy Eric Clark

You’ve had your head down, building your business for the past twenty years. You’ve been successful, growth has been great, you love what you do, but it’s time to start thinking about the next phase of your life.

Here are some of the factors that increase the likelihood of being able to sell your business, based on our experience as a private equity firm investing in Saskatchewan companies. If you’ve got these things right, you may not only sell, but even increase the value you can realize for your business.

Processes

The first major value driver relates to business processes – unsurprisingly, well-organized entities that have proper processes in place tend to be more efficient and effective than their competitors. A major drag on the time of most management teams is fire-fighting. If you’re constantly dealing with fires, the management team typically has less time and energy to spend on value-added projects. When selling a business, this situation will come back to haunt you because potential buyers will see disorganization as a risk factor and possibly even as a strike against the management team’s competence.

If you’re going to review your processes, it helps to keep a potential buyer in mind. Think about the due diligence that buyer will do on your company and the information they will request from you. If your organization can quickly and easily provide that information, you’re on the right track.

Management depth

The second major differentiator between businesses is the depth of management. Think about a professional football franchise: if the team only has one person to fill a position – any position – that’s a vulnerability. That vulnerability turns into an outright weakness if the position without any depth is critical – like the left tackle. Think about your company and your goal of moving out of the business: have you transitioned the day-to-day work within the company away from yourself? If you haven’t, it’s important to start filling the gaps in your lineup. When selling your business, a non-strategic acquirer (read: not your direct competitors) will be looking for this depth because they may not have the capacity to operate the business themselves.

If your management team lacks depth, you can automatically disqualify some potential buyers, which means you’ll receive fewer bids and the sales process will generally be less competitive. Start working to deepen your team early; the first person you find to fill a role often won’t be the right fit. You need to allow enough time for some turnover.

Nobody wants to give up control, so for many business owners this is the hardest part of a transition.

Decision-making

What will your actual role be in the operations and strategic direction of the business on the day that you want to sell? This question relates to the previous point: a major risk for a potential acquirer is whether the strategic decision-making power that has made the business successful over time is walking out the door with you. If you’re able to demonstrate that you’ve transitioned the strategic decision-making of the firm, it is more believable that when you walk out the door the management team can make the hard decisions that will inevitably be necessary.

Nobody wants to give up control, so for many business owners this is the hardest part of a transition. But to maximize the value that you’ll receive for your business you’ll need to demonstrate that you have done so – or be prepared to stay on for a few years. A tactic that works for some transitions is to start allowing managers to make decisions that may have minor negative consequences. As you coach people to improve their decision-making framework, you will develop more confidence in their ability to make decisions, and then you can allow them to make decisions with more meaningful consequences over time.

Future cash flow

Finally, if you’re looking to sell your business, you’ll maximize the raw value of your company by giving the next owners comfort in the future cash flows of the enterprise. When an investor is deciding what they’ll pay, they look to the future. They make a call on how sustainable the cash flow of the business is going to be in the coming years. If you’ve taken all the meat off the bone, the business won’t look particularly appetizing to the incoming owner. There are two main ways to ensure you’ve left enough meat for the next group.

First, make sure the business is strong when you’re selling. Keep your equipment up to date, your customer base diversified, and the key roles filled with good people.

Second, don’t stop identifying growth opportunities. Run the company like you aren’t planning to sell it – identify your next opportunities and go after them. The best way to articulate these opportunities to a potential buyer is to be partway through executing on them. Outgoing owners are often tempted to pull cash out of the company to fund their retirement. That can be the right strategy, but keep in mind that the consequence of doing so may be a lower valuation when selling the business.

A perfect scenario

In a buyer’s perfect world the business would be generating stable revenue from a variety of sources (customers, market segments, etc.). That revenue would come from customers that have relationships with key salespeople but not the outgoing ownership group. The outgoing owners would have gradually moved themselves out of the day-to-day operations of the business and would have begun the process of removing themselves from its strategic direction. The management team is now composed of individuals who don’t mirror the original ownership group – and the management team is setting the future direction of the company. Finally, the management team has identified and is executing on significant growth projects for the company and knows which projects will be carried out next.

Theoretically, there is a maximum that most buyers will pay for your business. It is very common for investors to value a company fully – and then apply discounts to that value based on the specifics of the business to arrive at a final offer price. The theoretical maximum value for your business is probably based on market forces more than on anything you’ve specifically done – so it doesn’t do any good to dwell on that. The discounts an investor will apply to that maximum value, however, are likely to be somewhat within your control. To minimize them, you’ll need to convince potential buyers that your business is being run effectively by a competent management team who knows where the future growth of the business is coming from – and can execute to deliver it.

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